The funding status of Canadian defined benefit (DB) plans dropped sharply in the fourth quarter (Q4) as a result of declines in both equities markets, which hit investment returns, and long-term interest rates, which boosted pension liabilities, Mercer Canada reports.

The Mercer pension health index, which represents the solvency ratio of a hypothetical plan, dropped to 102% in Q4 from 112% in the third quarter (Q3), the firm says. Furthermore, Mercer Canada reports that less than 30% of Canadian pension plans were fully funded at the end of the year, down from 60% at the end of Q3.

The S&P/TSX composite index dropped by 10.1% in Q4 to finish the year down by 8.9%, Mercer Canada reports. At the same time, U.S. equities also declined by 8.6% (in Canadian dollar terms) during the quarter and global equities were down by a similar amount. Canadian fixed-income markets rose in Q4, with long-term bonds gaining by 1.9%.

As a result, a typical balanced pension portfolio would have declined by 3.8% in Q4, Mercer Canada reports: “After defying headwinds for the first three quarters, financial markets finally succumbed to the pressure of rising short-term interest rates, trade wars, and turmoil in certain emerging market economies.”

Nevertheless, Mercer Canada points out that Canadian DB plans started the quarter in relatively good shape, funding-wise, which cushioned the impact of the market turmoil.

“Canadian pension plans took a significant hit in the fourth quarter, but thankfully they were starting from a very strong position” said Manuel Monteiro, leader of Mercer Canada’s financial strategy group, in a statement.

Looking ahead, financial markets may continue to experience heightened volatility in the new year, added Todd Nelson, principal at Mercer Canada, in a statement: “The global economy will face a challenging 2019 with the expectation of central banks continuing on their tightening path and the unsettling political backdrop.”